María A. Prats

Threshold cointegration and nonlinear adjustment between stock prices and dividends

According to several empirical studies, the linear present-value model fails to explain the behaviour of stock prices in the long run. We analyse the possible presence of threshold cointegration between real stock prices and dividends for the US market during the period from 1871:1 to 2004:6. According to our results, the null hypothesis of linear cointegration between stock prices and dividends is rejected in favour of a two-regime threshold cointegration model. We find also that stock prices do not respond to equilibrium error, and dividends respond to the past divergence only if the deviation from the equilibrium error does not exceed the estimated threshold parameter. This in turn would support theoretical models assuming that the stock price–dividend relation is nonlinear.

Are there threshold effects in the stock price–dividend relation? The case of the US stock market, 1871–2004

We use recent developments on threshold autoregressive models that allow deriving endogenously threshold effects to analyse the evolution of the US stock price–dividend relation over the period 1871 to 2004. More specifically, a mean-reverting dynamic behaviour of the stock price–dividend ratio should be expected once such threshold is reached. Our empirical results showed that significant adjustments would occur when, in a particular year, the stock price–dividend ratio had shown a decrease of more than 8.0% between the previous year and the fourth year before, which implies nonlinearities in the dynamic behaviour of the US stock price–dividend relation.

PORTFOLIO DESIGN AND THE GOAL OF IMMUNIZATION

In this paper, we analyze the influence of portfolio design on the goal of immunization in Spanish bond portfolios. Extending the work of Fooladi and Roberts (1992) and Bierwag et al. (1993), we test a wide set of strategies which includes duration-matching strategies and strategies based on the M-squared of Fong and Vasicek (1984) and the M-absolute of Nawalkha and Chambers (1996). We attempt to evaluate the effectiveness of these dispersion measures and justify the improvements in immunization when portfolios include a bond maturing near the horizon date.